A person often reads that low oil prices–for example, $30 per barrel oil prices–will stimulate the economy, and the economy will soon bounce back. What is wrong with this story? A lot of things, as I see it:

1. Oil producers can’t really produce oil for $30 per barrel.

A few countries can get oil out of the ground for $30 per barrel. Figure 1 gives an approximation to technical extraction costs for various countries. Even on this basis, there aren’t many countries extracting oil for under $30 per barrel–only Saudi Arabia, Iran, and Iraq. We wouldn’t have much crude oil if only these countries produced oil.

Independent oil companies in non-OPEC countries also have costs other than technical extraction costs, including taxes and dividends to stockholders. Also, if companies are to avoid borrowing a huge amount of money, they need to have higher prices than simply the technical extraction costs. If they need to borrow, interest costs need to be considered as well.

There are built-in delays in the oil production system. It takes several years to put a new oil extraction project in place. If companies have been working on a project, they generally won’t stop just because prices happen to be low. One reason for continuing on a project is the existence of debt that must be repaid with interest, whether or not the project continues.

Also, once an oil well is drilled, it can continue to produce for several years. Ongoing costs after the initial drilling are generally very low. These previously drilled wells will generally be kept operating, regardless of the current selling price for oil. In theory, these wells can be stopped and restarted, but the costs involved tend to deter this action.

Oil exporters will continue to drill new wells because their governments badly need tax revenue from oil sales to fund government programs. These countries tend to have low extraction costs; nearly the entire difference between the market price of oil and the price required to operate the oil company ends up being paid in taxes. Thus, there is an incentive to raise production to help generate additional tax revenue, if prices drop. This is the issue for Saudi Arabia and many other OPEC nations.

Very often, oil companies will purchase derivative contracts that protect themselves from the impact of a drop in market prices for a specified time period (typically a year or two). These companies will tend to ignore price drops for as long as these contracts are in place.

There is also the issue of employee retention. In a sense, a company’s greatest assets are its employees. Once these employees are lost, it will be hard to hire and retrain new employees. So employees are kept on as long as possible.

The US keeps raising its biofuel mandate, regardless of the price of oil. No one stops to realize that in the current over-supplied situation, the mandate adds to low price pressures.

One brake on the system should be the financial pain induced by low oil prices, but this braking effect doesn’t necessarily happen quickly. Oil exporters often have sovereign wealth funds that they can tap to offset low tax revenue. Because of the availability of these funds, some exporters can continue to finance governmental services for two or more years, even with very low oil prices.

4. Oil demand doesn’t increase very rapidly after prices drop from a high level.

People often think that going from a low price to a high price is the opposite of going from a high price to a low price, in terms of the effect on the economy. This is not really the case.

4a. When oil prices rise from a low price to a high price, this generally means that production has been inadequate, with only the production that could be obtained at the prior lower price. The price must rise to a higher level in order to encourage additional production.

The reason that the cost of oil production tends to rise is because the cheapest-to-extract oil is removed first. Oil producers must thus keep adding production that is ever-more expensive for one reason or another: harder to reach location, more advanced technology, or needing additional steps that require additional human labor and more physical resources. Growing efficiencies can somewhat offset this trend, but the overall trend in the cost of oil production has been sharply upward since about 1999.

The rising price of oil has an adverse impact on affordability. The usual pattern is that after a rise in the price of oil, economies of oil importing nations go into recession. This happens because workers’ wages do not rise at the same time as oil prices. As a result, workers find that they cannot buy as many discretionary items and must cut back. These cutbacks in purchases create problems for businesses, because businesses generally have high fixed costs including mortgages and other debt payments. If these businesses are to continue to operate, they are forced to cut costs in one way or another. Cost reduction occurs in many ways, including reducing wages for workers, layoffs, automation, and outsourcing of manufacturing to cheaper locations.

For both employers and employees, the impact of these rapid changes often feels like a rug has been pulled out from under foot. It is very unpleasant and disconcerting.

4b. When prices fall, the situation that occurs is not the opposite of 4a. Employers find that thanks to lower oil prices, their costs are a little lower. Very often, they will try to keep some of these savings as higher profits. Governments may choose to raise tax rates on oil products when oil prices fall, because consumers will be less sensitive to such a change than otherwise would be the case. Businesses have no motivation to give up cost-saving techniques they have adopted, such as automation or outsourcing to a cheaper location.

Few businesses will construct new factories with the expectation that low oil prices will be available for a long time, because they realize that low prices are only temporary. They know that if oil prices don’t go back up in a fairly short period of time (months or a few years), the quantity of oil available is likely to drop precipitously. If sufficient oil is to be available in the future, oil prices will need to be high enough to cover the true cost of production. Thus, current low prices are at most a temporary benefit–something like the eye of a hurricane.

Since the impact of low prices is only temporary, businesses will want to adopt only changes that can take place quickly and can be easily reversed. A restaurant or bar might add more waiters and waitresses. A car sales business might add a few more salesmen because car sales might be better. A factory making cars might schedule more shifts of workers, so as to keep the number of cars produced very high. Airlines might add more flights, if they can do so without purchasing additional planes.

Because of these issues, the jobs that are added to the economy are likely to be mostly in the service sector. The shift toward outsourcing to lower-cost countries and automation can be expected to continue. Citizens will get some benefit from the lower oil prices, but not as much as if governments and businesses weren’t first in line to get their share of the savings. The benefit to citizens will be much less than if all of the people who were laid off in the last recession got their jobs back.

5. The sharp drop in oil prices in the last 18 months has little to do with the cost of production.

Instead, recent oil prices represent an attempt by the market to find a balance between supply and demand. Since supply doesn’t come down quickly in response to lower prices, and demand doesn’t rise quickly in response to lower prices, prices can drop very low–far below the cost of production.

As noted in Section 4, high oil prices tend to be recessionary. The primary way of offsetting recessionary forces is by directly or indirectly adding debt at low interest rates. With this increased debt, more homes and factories can be built, and more cars can be purchased. The economy can be forced to act in a more “normal” manner because the low interest rates and the additional debt in some sense counteract the adverse impact of high oil prices.

Figure 2. World oil supply and prices based on EIA data.

Oil prices dropped very low in 2008, as a result of the recessionary influences that take place when oil prices are high. It was only with the benefit of considerable debt-based stimulation that oil prices were gradually pumped back up to the $100+ per barrel level. This stimulation included US deficit spending, Quantitative Easing (QE) starting in December 2008, and a considerable increase in debt by the Chinese.

Commodity prices tend to be very volatile because we use such large quantities of them and because storage is quite limited. Supply and demand have to balance almost exactly, or prices spike higher or lower. We are now back to an “out of balance” situation, similar to where we were in late 2008. Our options for fixing the situation are more limited this time. Interest rates are already very low, and governments generally feel that they have as much debt as they can safely handle.

6. One contributing factor to today’s low oil prices is a drop-off in the stimulus efforts of 2008.

As noted in Section 4, high oil prices tend to be recessionary. As noted in Section 5, this recessionary impact can, at least to some extent, be offset by stimulus in the form of increased debt and lower interest rates. Unfortunately, this stimulus has tended to have adverse consequences. It encouraged overbuilding of both homes and factories in China. It encouraged a speculative rise in asset prices. It encouraged investments in enterprises of questionable profitability, including many investments in oil from US shale formations.

In response to these problems, the amount of stimulus is being reduced. The US discontinued its QE program and cut back its deficit spending. It even began raising interest rates in December 2015. China is also cutting back on the quantity of new debt it is adding.

Unfortunately, without the high level of past stimulus, it is difficult for the world economy to grow rapidly enough to keep the prices of all commodities, including oil, high. This is a major contributing factor to current low prices.

7. The danger with very low oil prices is that we will lose the energy products upon which our economy depends.

There are a number of different ways that oil production can be lost if low oil prices continue for an extended period.

In oil exporting countries, there can be revolutions and political unrest leading to a loss of oil production.

In almost any country, there can be a sharp reduction in production because oil companies cannot obtain debt financing to pay for more services. In some cases, companies may go bankrupt, and the new owners may choose not to extract oil at low prices.

There can also be systemwide financial problems that indirectly lead to much lower oil production. For example, if banks cannot be depended upon for payroll services, or to guarantee payment for international shipments, such problems would affect all oil companies, not just ones in financial difficulty.

Oil is not unique in its problems. Coal and natural gas are also experiencing low prices. They could experience disruptions indirectly because of continued low prices.

8. The economy cannot get along without an adequate supply of oil and other fossil fuel products.

We often read articles in the press that seem to suggest that the economy could get along without fossil fuels. For example, the impression is given that renewables are “just around the corner,” and their existence will eliminate the need for fossil fuels. Unfortunately, at this point in time, we are nowhere near being able to get along without fossil fuels.

Food is grown and transported using oil products. Roads are made and maintained using oil and other energy products. Oil is our single largest energy product.

Experience over a very long period shows a close tie between energy use and GDP growth (Figure 3). Nearly all technology is made using fossil fuel products, so even energy growth ascribed to technology improvements could be considered to be available to a significant extent because of fossil fuels.

Figure 3. World GDP growth compared to world energy consumption growth for selected time periods since 1820. World real GDP trends from 1975 to present are based on USDA real GDP data in 2010$ for 1975 and subsequent. (Estimated by the author for 2015.) GDP estimates for prior to 1975 are based on Maddison project updates as of 2013. Growth in the use of energy products is based on a combination of data from Appendix A data from Vaclav Smil’s Energy Transitions: History, Requirements and Prospects together with BP Statistical Review of World Energy 2015 for 1965 and subsequent.

While renewables are being added, they still represent only a tiny share of the world’s energy consumption.

Figure 4. World energy consumption by part of the world, based on BP Statistical Review of World Energy 2015.

Thus, we are nowhere near a point where the world economy could continue to function without an adequate supply of oil, coal and natural gas.

9. Many people believe that oil prices will bounce back up again, and everything will be fine. This seems unlikely.

The growing cost of oil extraction that we have been encountering in the last 15 years represents one form of diminishing returns. Once the cost of making energy products becomes high, an economy is permanently handicapped. Prices higher than those maintained in the 2011-2014 period are really needed if extraction is to continue and grow. Unfortunately, such high prices tend to be recessionary. As a result, high prices tend to push demand down. When demand falls too low, prices tend to fall very low.

There are several ways to improve demand for commodities, and thus raise prices again. These include (a) increasing wages of non-elite workers (b) increasing the proportion of the population with jobs, and (c) increasing the amount of debt. None of these are moving in the “right” direction.

Joseph Tainter in The Collapse of Complex Societies points out that once diminishing returns set in, the response is more “complexity” to solve these problems. Government programs become more important, and taxes are often higher. Education of elite workers becomes more important. Businesses become larger. This increased complexity leads to more of the output of the economy being funneled to sectors of the economy other than the wages of non-elite workers. Because there are so many of these non-elite workers, their lack of buying power adversely affects demand for goods that use commodities, such as homes, cars, and motorcycles.1

Another force tending to hold down demand is a smaller proportion of the population in the labor force. There are many factors contributing to this: Young people are in school longer. The bulge of workers born after World War II is now reaching retirement age. Lagging wages make it increasingly difficult for young parents to afford childcare so that both can work.

As noted in Section 5, debt growth is no longer rising as rapidly as in the past. In fact, we are seeing the beginning of interest rate increases.

When we add to these problems the slowdown in growth in the Chinese economy and the new oil that Iran will be adding to the world oil supply, it is hard to see how the oil imbalance will be fixed in any reasonable time period. Instead, the imbalance seems likely to remain at a high level, or even get worse. With limited storage available, prices will tend to continue to fall.

10. The rapid run up in US oil production after 2008 has been a significant contributor to the mismatch between oil supply and demand that has taken place since mid-2014.

Without US production, world oil production (broadly defined, including biofuels and natural gas liquids) is close to flat.

Figure 5. Total liquids oil production for the world as a whole and for the world excluding the US, based on EIA International Petroleum Monthly data.

Viewed separately, US oil production has risen very rapidly. Total production rose by about six million barrels per day between 2008 and 2015.

Figure 6. US Liquids production, based on EIA data (International Petroleum Monthly, through June 2015; supplemented by December Monthly Energy Review for most recent data).

US oil supply was able to rise very rapidly partly because QE led to the availability of debt at very low interest rates. In addition, investors found yields on debt so low that they purchased almost any equity investment that appeared to have a chance of long-term value. The combination of these factors, plus the belief that oil prices would always increase because extraction costs tend to rise over time, funneled large amounts of investment funds into the liquid fuels sector.

As a result, US oil production (broadly defined), increased rapidly, increasing nearly 1.0 million barrels per day in 2012, 1.2 million barrels per day in 2013, 1.7 million barrels per day in 2014. The final numbers are not in, but it looks like US oil production will still increase by another 700,000 barrels a day in 2015. The 700,000 extra barrels of oil added by the US in 2015 is likely greater than the amount added by either Saudi Arabia or Iraq.

World oil consumption does not increase rapidly when oil prices are high. World oil consumption increased by 871,000 barrels a day in 2012, 1,397,000 barrels a day in 2013, and 843,000 barrels a day in 2014, according to BP. Thus, in 2014, the US by itself added approximately twice as much oil production as the increase in world oil demand. This mismatch likely contributed to collapsing oil prices in 2014.

Given the apparent role of the US in creating the mismatch between oil supply and demand, it shouldn’t be too surprising that Saudi Arabia is unwilling to try to fix the problem.

Conclusion

Things aren’t working out the way we had hoped. We can’t seem to get oil supply and demand in balance. If prices are high, oil companies can extract a lot of oil, but consumers can’t afford the products that use it, such as homes and cars; if oil prices are low, oil companies try to continue to extract oil, but soon develop financial problems.

Complicating the problem is the economy’s continued need for stimulus in order to keep the prices of oil and other commodities high enough to encourage production. Stimulus seems to takes the form of ever-rising debt at ever-lower interest rates. Such a program isn’t sustainable, partly because it leads to mal-investment and partly because it leads to a debt bubble that is subject to collapse.

Stimulus seems to be needed because of today’s high extraction cost for oil. If the cost of extraction were still very low, this stimulus wouldn’t be needed because products made using oil would be more affordable.

Decision makers thought that peak oil could be fixed simply by producing more oil and more oil substitutes. It is becoming increasingly clear that the problem is more complicated than this. We need to find a way to make the whole system operate correctly. We need to produce exactly the correct amount of oil that buyers can afford. Prices need to be high enough for oil producers, but not too high for purchasers of goods using oil. The amount of debt should not spiral out of control. There doesn’t seem to be a way to produce the desired outcome, now that oil extraction costs are high.

Rigidities built into the oil price-supply system (as described in Sections 3 and 4) tend to hide problems, letting them grow bigger and bigger. This is why we could suddenly find ourselves with a major financial problem that few have anticipated.

Unfortunately, what we are facing now is a predicament, rather than a problem. There is quite likely no good solution. This is a worry.

Note:

[1] For example, more dividend and interest payments are paid, tending to benefit the financial industry and the elite classes. More of the output of the economy goes to workers in supervisory positions or having advanced education. Other workers–those with more “ordinary” responsibilities–find their wages falling behind the general rise in the cost of living. As a result, they find it increasingly difficult to buy cars, homes, motorcycles, and other goods that use commodities.

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About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.

2,298 Responses to Why oil under $30 per barrel is a major problem

Don B
Here is a question for you. The Mississippi Bubble might be viewed as a predominately financial debacle. No resources disappeared. There was just a gigantic financial bubble with official government sanctioning of Keynesian monetary policy. The end of the episode can be seen in the quote below:

‘The collapse of Banque Générale and the Compagnie des Indes, which coincided with the popping of Britain’s South Sea Bubble, plunged France and other European countries into a severe economic depression and laid the groundwork for the French Revolution that occurred later on in the century.’

You can see many parallels to the current situation in the OECD countries and China. (There may also be the issue that resources are depleting…particularly energy). The questions: Do you think that if the French government had outlawed paper currency and gold, and instituted a digital money which they could tightly control, that they could have avoided, not the Crash of the Mississippi Company, but the crash of the rest of the French economy?

The tight control of digital money seems to be on the plate, right now. Do you think it can be made to work? Do you think that resource depletion makes it different this time?

Royal Dutch Shell Plc, which is on the brink of completing the oil industry’s largest deal in a decade, reported fourth-quarter profit that matched analyst estimates. The shares rose the most in almost seven years amid a rebound in global stocks and a selloff in the dollar.

Profit adjusted for one-time items and inventory changes shrank 44 percent to $1.8 billion, near the midpoint of the preliminary $1.6 billion-to-$1.9 billion range it gave last month, Shell said Thursday.

Great questions, Don. I hate to answer your question with a question, but I wonder if failed monetary policies of an 18th century France compares to failed monetary policies of today’s modern global financial system.

Also energy. Let me start there first. 18th century Europe saw the evolution of the first practical steam engines, a period which would ultimately be the beginning of the industrial revolution. In terms of resources, history shows that they had everything to look forward to in terms of cheap energy, coal and later oil, whereas we have come to the end of the energy line. So yes, our current resource depletion and the enormous energy requirements to extract what resources remain makes a considerable difference between then and now.

People living in cities can exist there only because of the excesses of civilization. Most of us are like hydroponic plants, only able to exist on nutrients flowing in from elsewhere. Where am I going with this. A collapse of a pre-industrial France, where most people still lived on the land, cannot compare to a collapse today. Sure, lots of the formerly wealthy joined the ranks of the pauper majority, but the carnage was probably more confined to the wealthy. I’m no French revolution authority by any means, but today is certainly much different. Not only are there so many more of us in total, but now most of us dangle our roots in a supply flow that is about to come to an end. It is for this reason that I don’t see an opportunity for another ‘revolution’, green or otherwise. There is no current substitute for cheap fossil fuels. Alternative energy sources are only derivitives of the fossil fuel industry. I think the greenies and permies have it wrong if they think windmills or PV panels will carry on some semblance of what we have come to know as normal BAU. But I digress…

Don, I can’t speak to digital currency. Would outlawing cash currency and gold have made a difference in France back then, I can’t say. In today’s world I am skepical of digital money. What a neat way to for a government to convert my money into their money anytime they want too. I’m concerned, but not really qualified to comment.

>>>The acquisition is significant for China, as government researchers have estimated as much as 7 billion tonnes of waste is buried around China’s major cities, and the capital Beijing is now surrounded by a belt of landfill sites known disparagingly as the “seventh ring road”.

“In the absence of substantial greenhouse gas policies, the U.S. and the global economy are unlikely to stop relying on fossil fuels as the primary source of energy, “ write Thomas Covert and Michael Greenstone of the University of Chicago and Christopher R. Knittel of the Massachusetts Institute of Technology. In the short- and middle-term, they say solar and wind are unlikely to “play a major role in base-load electricity capacity or in replacing petroleum-fueled internal combustion engines.”http://news.nationalgeographic.com/energy/2016/02/160204-us-energy-tipping-point-bloomberg/

Something just occurred to me – Obama is learning to negotiate! He’s starting out at 10 a barrel knowing that will get whittled way down. Just when you think someone cannot learn something, they do. Maybe there is hope after all.

Money spent on highway projects might just as well be burned in the streets for all the good highways will be in a post carbon world. At best, highways will be very expensive foot paths and bicycle trails. Electric cars? No way on this blue and green earth is that going to happen.

Speaking of which, they’re still working on widening 101 between Santa Rosa and Novato to 3 lanes, from the two lanes there still are in sections. By the time they get that done it will be time to use it for oxen carts.

Maybe Mr Musk has convinced Obama that a Hyperloop between every city in the US is a really, really, really good idea.

Personally, I think America got it right with efficient intercity air travel. Can you imagine the infrastructure cost of building out high speed rail all over the states? Because of the high speeds involved this includes immensely wasteful tunnels through mountains and high rise bridges. Compare all that to a few runways and an airport terminal.

To make any of this dazzling future work America would have to spend trillions of dollars renovating all of her energy and transportation networks while literally forcing her wage slaves to end their love affair with the internal combustion engine just as gas gazzling SUV sales are on the rise again due to low oil prices.

“Before this year the lowest level The Baltic Dry Index had reached was 556 in August of 1986 and the highest was in June 2008 at a stunning 11,612. Today saw the freight index hit a new milestone however, crashing through the 300 barrier for the first time ever – at 298, this is almost 50% below the previous record low.”

Thanks for your encouragement and for sharing a little of what your wife has gone through and of both your successes.

Actually, so far I’m not feeling the least bit inconvenienced by my changes in diet. The old cravings just disappeared.

One thing I miss about HVL is the year-round walkable climate. I would often walk to the mailboxes closest to the main entry gate, near the HVL administration building. My WI situation is only walkable after winter. To compensate, I picked up a treadmill and walk that 4 miles a day – boring, but doable.

Nice you could make the diet change without cravings and 4m a day is a lot! If it’s boring just find a good movie to watch. We sometimes take a drive down to the marina, then walk down to the small beach, then the other way to the end of that lake front road, but we both still put in a lot of time working and that’s a form of exercise. We have a treadmill but it’s covered in boxes, lol. Got to keep in shape and eat right in these later years as my wife and I discovered, but life is still good in advance of collapse whenever that happens.

T Boone Pickens back in 2008 claimed oil would never be cheap again and as proof said the United States had more holes drilled for oil than a slice of swiss cheese. Did not anticipate the fracking.
He still has up his website “Pickens Plan”http://www.pickensplan.com
As far as not having a clue…well, he kinda knows, I suppose

“The population of the world at the beginning of the Industrial Revolution was about 791 million. The total population of the earth is today 7.2 billion (India and China alone account for 2.66 billion of them).
It is clear to anyone who considers the problem of feeding, housing, providing transportation and communications, heating, cooling, and purifying water for a population that is more than 900% larger than at the beginning of the Industrial Revolution requires more forms of energy, not fewer.
Since I began the Pickens Plan in the summer of 2008, I have said we should use any form of fuel available to provide for our economic growth. That includes not just natural gas, coal and oil; but also hydro, geothermal, nuclear, wind, and solar.

I think T Boone Pickens meant “Oil would never be cheap to produce again.” I think he is correct about this.

Quite a few of the energy types T. Boone Pickens lists require subsidies. I suppose as an investor, this means he will take whatever free money he can get. This doesn’t mean these energy sources will really work. Instead, they will simply run up unsustainable debt faster.

“T.Boone Pickens”. What a wonderful name! Only in America, surely! I remember his name from the late 1970’s in oil deals etc. It sounds like what you are saying is that he will live off the subsidies. Nice work when you can get it.

The population of the world at the beginning of the Industrial Revolution was about 791 million. The total population of the earth is today 7.2 billion (India and China alone account for 2.66 billion of them).

It is clear to anyone who considers the problem of feeding, housing, providing transportation and communications, heating, cooling, and purifying water for a population that is more than 900% larger than at the beginning of the Industrial Revolution requires more forms of energy, not fewer.

Since I began the Pickens Plan in the summer of 2008, I have said we should use any form of fuel available to provide for our economic growth. That includes not just natural gas, coal and oil; but also hydro, geothermal, nuclear, wind, and solar

T Boone gets some of it….from his website The Pickens Plan

Also, he sees a economic contraction because of high cost of oil extraction

@Vince the Prince
“Since I began the Pickens Plan in the summer of 2008, I have said we should use any form of fuel available to provide for our economic growth. That includes not just natural gas, coal and oil; but also hydro, geothermal, nuclear, wind, and solar”

What matters is not the energy in itself but the net energy. All energy systems which requires subventions probably contain little net energy – or the net energy is considerably lower related to the ‘ordinary’ energy environment (read coal, oil, gas). Now – as Gail has stated several times – the net energy of oil is diminishing because of higher extraction costs which causes the predicament we are in now. You have seen the graph where energy consumption and GPD shows 99 % correlation – this means, as I see it, that money in its essence is a reflection of energy, so if you have to inject money in an energy system (for instance wind mills) it is the same as to inject energy in that energy system. You have to develop an energy system which can deliver, certainly not receive energy (money).

I sometimes wonder what state we’d be in if CO2 hadn’t become the no.1 threat to humanity, if coal plants still ruled the world, and oil flowed for another hundred years…

Wouldn’t we reach limits all the same? Wouldn’t we still have the financial problems we have?

But what if we bridged the gap to nuclear fusion within a decade or two? Would having access to almost unlimited power make any difference? Wouldn’t something like that kick the debt can down the road for a long ways?

And at that stage, wouldn’t global population growth be decelerating due to higher standards of living? Wouldn’t a global regulatory body be established to guide humanity in a more desirable direction after its consumption stage of development? In other words, a world without much material or economic growth, but immense growth in knowledge and wisdom and the ability to apply them.

Or is it more likely that we missed that train to the future by a few minutes because we were stuck in traffic checking our Twitter feed?

In a way you are right, but the question still remains: What about the 7 billion people? All of us highly dependent on cheap net energy. How many shall perish, and who shall survive? ‘An immense growth in knowledge and wisdom’ is desirable, but is it feasible?

Rick your asking what should have been done. I can give you my point of view, others have theirs.

First a global financial institutions should have been created. I´m not talking about a BIS, bank for central bankers. But something of a UN bank, bank for everybody. That institution should have bought all banks and publicly traded companies on all stock markets globally. Then stock markets and private banks should have been outlawed. Publicly traded stocks on stock markets and privately owned banks are pure murder. Actually all stocks on all corporations everywhere should have been bought and made in to co-ops. Not because I´m a communist, but because growth requires profits, but co-ops can manage without profits, therefore co-ops can manage without growth.

Then that bank should have given 50y loans at 0,01% interest to all governments, municipalities, co-ops and NGOs that develop 99% sustainable practices, whatever they may have been. Truly given all the money they need and want, as long as its 99% sustainable. Vertical gardens made out of recycled materials, building wind mills (small)everywhere, composting and soil enrichments with biochar, free education of girls everywhere, community gardens, sustainable fisheries everywhere, shared apartments -apps so that new buildings are not needed because the buildings already built have rooms to be filled etc. etc. If its 99%, here you go, a truckload of money to start the co-op. That 50y loans at 0,01% thingy would have created full employment everywhere for decades.

Oh, and no central banks that issue currency on interest. Instead national currencies backed by the national GDP. The UN bank would have issued currency backed by the world GDP.

So first I would have prevented a financial collapse by buying everything privately owned that has to make profits or collapse. Then provided massive amounts of money to co-ops that create sustainable long term solutions. And virtually removed the global rentier class, one payoff and never again any money to the rentier class.

Those would have not replenished raw materials and prevented mass extinction of everything else on the planet due to loss of habitat, but would have eased the Seneca cliff, by making a global SHTF collapse impossible. Our population would have first grown, then slowly gone back to the 1 billion mark our diminished biosphere could have supported. But those things would have given time for robotics automation to improve, AIs to form, nanotech to be taken to every day use and Quantum Mechanics to provide really wild real world solutions.

But if you Rick think about it, maybe its all for the better that we collapse now. Think what damage our immature species could have caused with even more advanced technology..

I wish I could have voted you in as Supreme Commander at a key moment in my fictional timeline so as to bring about the parralel existence you outlined! Now that would have been something worth voting for.

But alas, we’re stuck with the reality we have before us with a species that became too successful for its own good and is now borderline insane. Some of its more observant members huddle around blogs such as this to mourn what could have been, but suspect will never be. And that’s about as much wisdom as you’re going to get on this little blue rock from now as we decend into chaos.

What’s funny is how much human brains try to rationalise the unfolding situation always placing themselves at the center of it all, still trying to squeeze the last drop of purpose from an overly inflated sense of self worth – an ego that is soon to be as spent as the spent fuel ponds themselves!

Yes, nothing like a dash of reality in your daily cocktail to bring even the highest flying traders of stocks crashing down to mother earth will a dull thud.

And yet, deep down I know that it couldn’t have happened any other way. Maybe a few details would have changed here and there, but overall this species was destined to go the way of the dinosaurs.

And on that point, it’s well known that some species of dinosaur became birds. And birds are generally considered to be a species that lives gently on the Earth. I’m not sure of the accuracy of that consideration but it certainly appears to be true at first glance.

So when you say… “Think what damage our immature species could have caused with even more advanced technology..” I was imagining a similar conversion of our immature, clumsy, irresposible species into one that through the application of advanced technology would live as gently on the Earth as birds do.

I understand that that sounds ludicrous when taking into account our trajectory and observing the levels of destruction that we as a species currently exact on the planet, but as you so efficiently described in your hindsight exercise, something close to a steady state economy could have emerged given adequate planning space outside of current economic constraints.

That’s why I’m afraid any such concepts must remain firmly in the realm of theoretical mindspace, where jolly little thought experiments live out their short but pleasant virtual existence. And when they die, they get sucked into a parralel universe where rainbows and unicorns dwell and the unicorn population is regularly culled by a mysterious and benevolent hidden hand administrator.

To create anything resembling a fair system, where sustainability reigns supreme, something close to a Brave New World level of dictatorial control would be required to keep all the variables within acceptable parameters.

I’m inclined to believe that natives of such a system would be well adjusted to it and would accept the imposed limitations in the same way that many city dwellers now accept their back and forth routines – enduring the living hell of rush hour, a job that they despise, diminishing prospects for any kind of meaningful existence, and the perception that resistence is futile.

But again, it was not to be, given the exuberance of the human ego and the ability of our species to consume many times the resources needed for… shall we say, a more “sensible” and mature way of life.

“But what if we bridged the gap to nuclear fusion within a decade or two? Would having access to almost unlimited power make any difference? Wouldn’t something like that kick the debt can down the road for a long ways?”

Compounding growth is often difficult to really get a hold of – 2% growth doesn’t sound like much, right? What about 4%?

A useful tool is the rule of 72 – divide 72 by the rate of growth to find the doubling time. So, at only 2 percent growth, it doubles every 36 years. At 4 percent, that is every 18 years. 10 percent growth, just over every 7 years.

Keep in mind that all the moving parts of the economy need growth. Tax revenues must grow. The number of workers must grow, if the pensions, old age security, etc are to keep paying out (they are essentially ponzi schemes). Water consumption, and food production, and iron, and nickel production must all grow.

Let’s say that in the 1980s, they had successfully created cold fusion, and by now it was rolled out all over the world. How many more doublings do you think we could do? How many times could we double the population? If the population levels off, how does the pensions and taxes get paid? If automation continues replacing workers, how do the debts, taxes, pensions get paid?

How many times can we double food production? How many times can we double our rate of consumption of fresh water? Double cement production?

So, I think under any scenario, we would be reaching the end of the current system. Even if we had fusion reactors and robots mining asteroids to keep doubling our energy and raw materials, we would be hitting ecological limits. Even if we had the energy and technology to thwart global warming, there would be other crises.

What other system we could have, and how the transition could go, might be different with abundant energy, or it might end up the same or worse, since the advantages would be countered by the system undergoing one or two more doublings than our current system.

As I former program officer for the Office of Fusion Energy, US Department of Energy, I can assure you that even if the Stellarator “works”, the engineering and financial issues will stop it from producing affordable energy. The classic quip it that fusion energy has been 25 years in the future, for the past 50 years.

“With a temperature of 80 million degrees and a lifetime of a quarter of a second, the device’s first hydrogen plasma has completely lived up to our expectations”

” Successive extensions are planned until, in about four years, discharges lasting 30 minutes can be produced and it can be checked at the full heating power of 20 megawatts whether Wendelstein 7-X will achieve its optimisation targets.”

“Wendelstein 7-X, the world’s largest stellarator-type fusion device, will not produce energy. Nevertheless, it should demonstrate that stellarators are also suitable as a power plant. ”

So, if everything goes to plan, in 4 years they will know if Stellarators can compete with Tokamaks. For those of you following along, ITER is expected (again, assuming everything goes to plan) to begin tests in 2027 to determine if a Tokamak can generate more energy than it consumes:https://en.wikipedia.org/wiki/ITER

I was envisioning a scenario where “growth” was conveniently absent from the equation. I have never understood why we as humans were subject to the same fundamental laws that govern all other natural systems. Surely our superior intellect is capable of circumventing these laws even if just for a little while? But maybe that’s an example of our collective hubris.

Our economic system and all of its subsystems are ponzis within ponzis because they were set up that way. Had we been more like ants, we may have developed a resource based steady state economy constrained by very strict control mechanisms such as a ruthless application of birth control, distribution of basic goods and so on.

These measures appear authoritarian and undesirable to most people. But look what a lack of these measures has led to. Had our genes favored longevity of the species more than a collective drunken night out, we would have organised around more sustainable values. We could have had the equivalent of an ant farm like existence where an easily managed population lived in relative comfort with no individual left behind.

To achieve the required level of contented subservience, the human population would be genetically modified and all involved would see it as a good thing. There would be no room for chaotic selfish behaviour. No rocking of the communal boat.

Starting to feel creeped out yet?

Hmm, thought so.

It’s nothing more than the plans laid out in much of the elite’s own writings. And much of what we see unfolding in the west already paints that picture more than the people living it would realise.

Everyone is being systematically plugged into a system of control so tight there will be no escaping is clutches. Much of the population is already on some type of welfare, on some kind of antidepressant medication. Most everyone owns a smartphone through which all transactions will be made once cash is kicked to the kerb. Beyond that, the next stage is to promote the practicality of electronic tattoos, which as Regina Dugan – former director of DARPA and now head of Google security – insidiously stated, “the kids will be begging for ’em because it’ll piss off their parents.”

Once all the sheep are rounded up in the electronic control grid, the sheering begins and the shepherd decides what happens next for the entire herd…

The system is rigged. If the system is rigged it could be rigged to our benefit as much as to our detriment. Unfortunately, instead of philosopher kings and queens running the show, we have bankster oligarchs intent on filling their pockets until the ponzi they erected collapses burying everyone including themselves in the process.

The way things are going, it doesn’t look like any of those plans will come to fruition anyway. The way things were going to turn out… it’s probably a blessing.

“Our economic system and all of its subsystems are ponzis within ponzis because they were set up that way.”

First, I don’t think our systems were “setup”, so much as they are emergent. Second, at risk of becoming part of an echo chamber, it seems the universe and every subsystem within it is a dissipative structure, which must grow or die. This “steady-state” Utopia may be just as impossible as all other utopias.

As for command economies, the problem is, everyone makes mistakes, errors, has flaws. Concentrating power into fewer and fewer hands may reduce the frequency of errors, but greatly magnify the consequences. Command economies seem to fail even with all the abundance of BAU; communists seem, almost without fail, to manage to create famines and mass die-offs even without any physical shortages.

As for elites and their schemes, it seems to me they have as much diversity of vision as any other random group of people, and it seems their plans gang aft agley as much as anybodies. If the Gates foundation really is responsible for this outbreak of microencephalitis, and it really was not intentional, that really should show all there is to know about Oz the Great and Powerful.

I am, of course, choosing to attribute to incompetence rather than malice. It could be the communists intentionally depopulated their own countries, and plagues are released according to some secret master plan.

“The economy as we know it, is facing a lethal confluence of four critical factors:

1. The fall-out from the biggest debt bubble in history
2. A disastrous experiment with globalization
3. The ‘massaging’ of data to the point economic trends are completely obscure
4. And most important of all: the approach of an ‘energy-returns cliff-edge’

I think a lot of people do see it coming, and do talk about it in depth, but as you say, most block it out because… what can you do about it?

The spark that moves us on from proxy wars in the middle east to a direct conflict between superpowers could happen in the least expected way, as you suggest. Once things escalate from there it’s virtually impossible to stop. In this day and age, such a conflict would be short lived… and not much would be left in the way of spoils…

Some people believe WWIII is slated for sept 2016 as part of some pre-planned final showdown where Putin leading the BRICS will triumph over the “evil” NATO…

Things do appear to be lining up towards that goal with western MSM demonising Putin while the alternative media crowns their new prince – a messianic figure promoting nationalistic freedoms.

On closer inspection, we have resource wars. And the final conclusion to that will be a winner takes all scenario where desperation leads to drastic measures against the strongest rival.

Could the BRICS mount a suprise attack on the US? Or vice versa?

The more I think about reaching those kinds of limits, the more I believe that no party involved could be that suicidal. Any kind of preemptive strike attempting to disable the stongest opponent would be met with immediate retaliation and annihalation.

For example, if the BRICS carried out an EMP strike over much of the US, they would then have to mop up as many of the retaliatory nukes as possible. Is it survivable? Does Russia have enough space-based laser platforms and ground to air missiles to soak up a counter punch?

The only way that scenario unfolds is because something goes wrong, somebody somewhere makes a mistake and all hell breaks loose. Salvase quien pueda.

Even in the best case scenario, where only tactical nukes are involved on the battlefield, the conflict could spread to europe turning it into a hell hole once again.

And if this conflagration is a cover for resource depletion, insurmountable debt, the end of civilisation as we know it, then it was inevitable anyway. It’s the fireworks display we have been collectively working towards. Our crowning achievement. Enjoy the show. Streaming live to your personal snitch device. Should be spectacular.

This new study by David Korowicz explores the implications of a major financial crisis for the supply-chains that feed us, keep production running and maintain our critical infrastructure. He uses a scenario involving the collapse of the Eurozone to show that increasing socio-economic complexity could rapidly spread irretrievable supply-chain failure across the world.

For once I agree with you. The President is a patsy. Hillary has already said it would be a pleasure to do business with the elite. I think Obama became an Obama-nation when he had to give up on his rhetoric and do the bidding of those who paid for his campaign. Almost his very first act, appointing Larry Summers as his Treasury Secretary, spelled it out loud and clear. Screamed it from the roof tops in fact. One of the banksters who should have gone to jail getting such a position ruined my opinion of Obama. And it’s only got worse, except he could have been a real Republican and not a shadow one.

But now that the world price of oil has fallen well below the prices fixed in Argentina, the situation has completely reversed. In the name of saving jobs, Argentina is now paying to extract oil for export, which amounts to basically shoving cash in the hands of foreign consumers.

Thank you. I see we are the laughingstock of energy world. I’ve always told Vaca Muerta was a fake proposal, now people see I was right.

It’s a good article, while it fails on two points:

1- It exagerates somewhat electricity subsidy cuts and related bills spikes, which go up to 500% in Buenos Aires region but are lesser away (200% where I live). What Kirchners did was utterly stupid, given they oversubsidized Buenos Aires (not only reg. electricity), which never voted for them anyway, and chastised other places. Generally speaking, the article fails to see we were overall paying cheap bills upon world or South American standards.

2- There is something more subtle, not easy to talk about. The article fails to see the new subsidy is a conquest of Chubut oil workers pressure. At first, the minister said he wasn’t to set any measure and would let production disappear if not profitable, but oil workers shouted loudly and got the subsides for the enterprises. There is something else about this. Biggest gas field is located there, in Escalante, Chubut province. It is called Cerro Dragón (Dragon Hill). Its workers are therefore known as “the dragons”. In 2012, dragons went on strike demanding wages rising, shuted off production and cut some roads. This lasted a week or so, and in case the strike would have lasted another week the country would have unglily run out of mehane. The gov sent gendarmes to put some order (gendarmes are a semi-militarized national police force, something like US National Guard). In the end, the conflict was resolved with a wages rise, but when gendarmes were returning to Buenos Aires a bus transporting 50 of them suffered an “accident” killing all of them. Some of us thought this was a “message”. In fact, two months ago, in a province I know very well, another gendarmes bus had a similar accident with the same outcome. This was not an oil related situation, but there are striking similiarities and I know who did it. Reg. the recent oil subsidy, I suppose the gov thought it better to avoid clashes and release money to subsidy oil production.